European Parliament Passes New Accounting Rules

by AccountingWeb on Dec 19 2005printer friendly

The European Parliament has passed strengthened accounting rules to increase transparency and to avoid some of the pitfalls of the Enron and Parmalat scandals. The Financial Times reports that companies in the European Union will have to disclose off-balance sheet arrangements and their financial impacts. Listed EU companies will be required to publish annual corporate governance statements, as well.

The amendments to the Accounting Directives also require the disclosure of any “unusual transactions” in an effort to avoid “creative accounting” that might be used to mask failing financial positions. Such transactions might include deals with the spouse of a board member, for example. The Financial Times reports corporate boards are also confirmed to be collectively responsible for information published in annual accounts and annual reports, under the new legislation.

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Balance sheet total and net turn over thresholds for small and medium sized limited liability will be increased 20 percent, redefining these entities. The balance sheet totals for a small company have increased from €3,650,000 to €4,400,000 and net turn over from €7,300,000 to €8,800,000. The balance sheet totals for a medium company have increased from €14,600,000 to €17,300,000 and net turn over from €29,200,000 to €35,000,000.

“This is good news. The approach followed by the European Parliament is totally in line with what I intend to achieve with Better Regulation. We improve disclosure for the more complex listed and unlisted companies, and, at the same time, allow Member States much more scope for reducing burdens on small and medium sized companies from red tape, which will spur economic growth,” said Internal Market and Services Commissioner Charlie McCreevy in a prepared statement.

The European Commission proposed these new accounting rules in October 2004. The Financial Times reports the initial proposal was passed by the parliament with the amendments for the possibility of reducing reporting burdens for smaller and medium–sized businesses.

As U.S. business executives are becoming more accountable for the accuracy of the information in their companies’ financial statements, foreign credit information verification problems are being seen, according to Atradius Trade Credit Insurance, Inc.

Atradius president Neil Leary said in a prepared statement, “The credit information flowing from overseas markets back to multi-national companies isn’t always as comprehensive and detailed as would be expected from U.S. reporting.” Atradius Trade Credit Insurance, Inc is the U.S. subsidiary of the Atradius Group, which is the second leading trade credit insurer in the world.

“By trying to let foreign operations function somewhat autonomously, senior executives don’t get receivables management reports up to domestic best-practice standards, which includes all available information, whether its deemed material or not,” Leary continued. In many countries, it is a traditional business practice to be somewhat subjective in determining what information is noteworthy, and limit upward reporting to those instances. This leaves CFOs facing corporate governance issues of having to sign off on due diligence that may not be as complete as they would prefer.

“One strategy to enforce uniform credit risk management discipline across operations around the world is to partner with a global trade credit insurer. These insurers help strengthen global credit management procedures by conducting thorough risk assessments on the creditworthiness of customers worldwide and providing an expert, third-party opinion, in one standardized process. This helps senior executives feel more confident about signing off on the numbers on foreign receivables.”

“A global credit insurance partner also brings the power of a large global database on millions of companies and buyers whose performances they are underwriting. Policyholders can access these databases in real-time online to assess prospects’ creditworthiness, set credit limits and view policy coverage.”